You must have heard this popular saying: “too much of anything is bad“. Well, it also applies to investment choices.
If you’re an investor that likes to follow every new mutual fund that gets introduced to the market, you will soon discover that you have purchased too many for profitability.
How many mutual funds are too many?
There is no right or wrong number; one should only have a decent amount of mutual funds. Investing in a few mutual funds creates opportunities for a diversified portfolio, better risk management, and wealth creation.
However, you will know that you have too many when additional mutual funds do not add any benefit to your current portfolio but instead decreases expected returns.
What can you do to avoid too many mutual funds?
If you are new to investing and are trying to play it safe, look for the right mix of funds to help you maintain a strong balance without worrying about losses.
Understanding your risk tolerance, financial goals, and if you want passive or active management will inform your decisions.
Why holding too many mutual funds is bad for you
When you have too many funds of the exact nature and objectives, you’re actually just creating an index fund but a more expensive one. It becomes difficult to generate returns because the low-return funds already negate the profit made in the portfolio.
It also makes monitoring hard. As the number of funds increases, it can get time-consuming and difficult to review your portfolio performance, especially with underperforming investments.
With mutual funds, there’s such a thing as “too diverse”. As much as there is no perfect number of funds you must have in your portfolio, there is a right strategy depending on your financial goals and preferences.
The best way to not fall into the trap of over-diversification is to seek financial advice from reliable experts. Based on your objectives and risk tolerance, they can provide valuable tips on the adequate diversification that works for you.